Europe’s grand plan risks slow death by a thousand cuts

It depends how it is done, but the omens aren’t good. The message from bankers at the Association for Financial Markets in Europe (AFME) annual dinner in London this week was a concerning one.
This was not because of the reference by the guest speaker, Jean-Claude Trichet, to just how close the world has come to a repeat of the Great Depression. Even the European Central Bank president would no doubt admit that’s still very much a real and present danger. Rather, it was because there seemed to be scarcely a person in the room who thought the grand plan to recapitalise the European banking system would do the trick. Indeed, many took the same view as Josef Ackermann, chief executive of Deutsche Bank, that it’s likely to be outright counter-productive.

The overwhelming message was: We don’t need this new capital. And if regulators really are going to force us to mark sovereign debt to market and backstop capital to 9pc, then we’ll be doing it by shrinking the balance sheet, not by raising new equity at today’s penalty rates. Thanks very much, but no thanks.

Now, in itself, this is obviously not a particularly helpful attitude. With many banks once again struggling to find market funding, something plainly has to be done. We seem to stand on the brink of another Lehman’s moment. Some way of plugging the dam must be found before it’s too late.

But if the response of leading European banks to the forced march to higher capital ratios is to squeeze credit even further, then the prospect of sudden death though cascading default is only replaced by slow death by a thousand cuts.